What Exactly Are NFTs, and What Are Their Tax Implications?

If you’ve been reading the news lately, then you’ve heard of NFTs: non-fungible tokens. Essentially, these are unique pieces of code that underlie a piece of digital media, such as a photo, artwork, song or video. While the media can be viewed and shared by anyone, owning the NFT gives the buyer exclusive ownership of the original. In Luddite terms, it’s like buying Michelangelo’s David and putting it on public display.

From one angle, this just makes historical sense. People have always put their money to good use by buying art and supporting artists. But NFTs are very new, and it isn’t always obvious how they fit with the more traditional understanding of assets (for buyers) and income sources (for sellers). We’ll demystify some of that in this post.

NFTs and HMRC

As with cryptocurrencies, it took a little while for the legal and tax establishment to catch up with the existence of NFTs. However, while this is a fast-moving area of legislation, the principles at work are relatively straightforward. They can be outlined as follows:

• If you are the originator of the NFT and you sell it to a buyer, then you may have to pay income tax on the proceeds. As with any transaction for profit, whether tax is due, and how much, will depend on the value of the sale and whether you have already used up your tax-free personal allowance for the year.
• If you buy an NFT and sell it on for profit, then the sale will be subject to capital gains tax. The rate of tax will depend on how long you held the NFT before passing it on to its new owner.
• If you swap an NFT for another or give it to someone as a gift, then this will also be subject to capital gains tax, like any other asset. The only exception is if the transaction takes place between spouses.

Between the lines

In outline then, NFTs are treated like any other asset when it comes to taxation. The fact that they are entirely digital does not mean that they “don’t count” when it comes to filling in your tax return! If you need any proof of this, HMRC recently seized three NFTs as part of a VAT fraud case.

However, the law is evolving fast and individual cases can pose specific issues. Questions of ownership and intellectual property are still being worked out, and these, too, have an impact on exactly how a transaction involving NFTs will be taxed. If you’re buying, selling or creating NFTs, it’s always a good idea to talk to a specialist accountant who can provide reliable, up-to-date advice.

If you’re self-employed and thinking of selling NFTs for your creations, or buying them to add to your portfolio of assets, get in touch with Tax Tribe. Our friendly, expert online accounting service will answer your questions and provide a free, personalised quote. We look forward to hearing from you!